During the 1980s, there was a huge boom in technology stocks. This resulted in massive capital gains for investors and saw many companies raise lots of money by issuing public equity (stocks). However, during the next few decades, the dot-com bubble burst and stock prices plummeted. Since then, there has been a constant increase in IPOs, with technology companies being the primary issuers.
The main differences between IPOs and stocks
Here are the main differences between IPOs and stocks all investors should know.
Buying and selling
The main difference between an IPO and stock is when they can be bought and sold on exchanges. IPOs are issued by private companies that do not have shares listed on any major stock market or exchange. These IPOs are usually offered to institutional investors who can buy them at a discount compared to when they become publicly traded shares. By issuing these shares, companies are given a large influx of capital to help them expand and grow their business.
In contrast, stocks are already publicly traded on exchanges like the New York Stock Exchange or NASDAQ. These can be bought and sold by any individual investors from anywhere in the world. They have been issued by companies that have either been through an IPO or have chosen to become public themselves via initial public offering (IPO) without first receiving investment from venture capitalists.
Stocks may be part of a company’s capital structure, and stocks given to executives is called an employee stock option plan (ESOP). IPOs do not have any such plans, so they can be seen as riskier when there has been very little information on their performance released.
Another difference is when companies choose to go public. IPOs are done before firms reach their peak, whereas stocks are issued when companies already have high value and can raise capital by issuing them in the stock market. An excellent example of this would be Facebook who received investment from venture capitalists before launching its IPO at $38 per share in 2012 (and currently trades around $20). Conversely, Google went public after it had become very profitable, allowing its founders Sergey Brin and Larry Page to retain a high share of the company.
Another difference between IPOs and stocks is how shareholders vote on issues such as board composition at public companies, stock splits or mergers. Stockholders usually get one vote per share they hold with them. At the same time, IPO investors receive considerably less depending on the type of securities they buy with their investment in new issues.
Risks associated with IPOs and stocks
IPOs are riskier for investors as they typically do not release financial information such as audited books, profit-loss statements, or balance sheets, which most public companies provide to the market. There may be times when an IPO’s shares can trade below their initial offering price (when issued) due to a drop in demand because the company is unproven. Since there is no history of operations, it will not have any track record to tell people if their investment will go up or down.
IPOs are also often expected to have less liquidity than other securities because they are considered too high risk for mutual funds, pensions or other institutions. IPOs are generally done by small-cap companies that need to raise a lot of money to expand their businesses, which makes them high risk compared to larger, more established publicly traded companies.
Investing in IPOs or stocks can be profitable and exciting, but do come with some risk. New investors interested in trading IPOs and stocks should use a reputable online broker from Saxo Hong Kong and try out a demo account before investing real money. This will allow you to try out different trading strategies and practise your trading skills.